Question

Green Eggs and Ham LLC has a WACC of  11.0% and the CFO has forecasted the following free cash flows (FCFs):

Year	1	2
Free Cash flow	-$50	$145

The firm also has $800 million in debt with 10 million shares outstanding. If FCFs grow at a forever rate of 5.0% after Year 2, what is the price per share of Green Eggs and Ham LLC?

	a.	$133.21
	b.	$72.73
	c.	$213.21
	d.	$173.75
	e.	$137.72

Answer 1

The price per share is computed as shown below:

= FCF in year 1 / (1 + WACC) + FCF in year 2 / (1 + WACC)² + 1 / (1 + WACC)² [ ( FCF in year 2 (1 + growth rate) / ( WACC - growth rate) ]

= - $ 50 million / 1.11 + $ 145 million / 1.11² + 1 / 1.11² [ ($ 145 million (1 + 0.05) / ( 0.11 - 0.05) ]

= - $ 50 million / 1.11 + $ 145 million / 1.11² + $ 2,537.5 millon / 1.11²

= - $ 50 million / 1.11 + $ 2,682.5 million / 1.11²

= $ 2,132.132132 million

So, the price per share will be computed as follows:

= ($ 2,132.132132 million - Debt) / Number of shares

= ($ 2,132.132132 million - $ 800 million) / 10 million

= $ 133.21 Approximately

So, the correct answer is option a.

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